Thursday, January 5, 2012

People are inclined to give much more legitimacy to market outcomes than policy outcomes engineered by governments. That is why there is a whole industry devoted to convincing people that the upward redistribution of income over the last three decades, which has given the bulk of economic gains to the One Percent, is really just the result of the natural workings of the market.

David Ignatius is one of the people who works in this industry. His Post column today urges readers to contemplate the awful thought that, quoting Francis Fukuyama:

"What if the further development of technology and globalization undermines the middle class and makes it impossible for more than a minority of citizens in an advanced society to achieve middle-class status?”

It is very useful to the One Percent to pretend that their wealth and the near stagnation in living standards for everyone else is just the result of "the further development of technology and globalization." However this has nothing to do with reality.

Globalization has hurt the living standards of the middle class because it was designed to have this effect. Trade agreements like NAFTA were quite explicitly designed to make it as easy as possible for General Electric and other manufacturers set up operations in the developing world and export their output back to the United States. This has the effect of putting U.S. manufacturing workers in direct competition with low-paid workers in the developing world.

We could have designed these deals to put our doctors, lawyers, economists and other highly paid professionals in direct competition with their much lower paid counterparts in the developing world. We could have constructed trade deals that remove all the obstacles that make it difficult for students in China, India, and elsewhere and to train to U.S. standards and then practice their professions in the United States.

If globalization had followed this path it would have produced enormous benefits to both the middle class and the economy as a whole. We would be able to get health care, university education and many other services provided by highly paid professionals at much lower cost.

In the same vein it is not technology by itself that has made some people very rich. It is largely government granted patent and copyright monopolies that have made people rich. These polices are becoming increasingly inefficient mechanisms for supporting innovation and creative work.

In the case of prescription drugs alone, patent monopolies raise costs by more than $250 billion (@1.7 percent of GDP) a year compared to a situation in which drugs were sold in a free market. This amount is roughly 5 times as much as the amount that is at stake with extending the Bush tax cuts to the richest 2 percent of taxpayers. There are more efficient mechanisms for financing drug research however this topic is largely excluded from public debate.

The great fortunes that have been made on Wall Street come in part from implicit too big to fail insurance from the government, exemption from fraud laws, and being granted special tax treatment. Even the International Monetary Fund has noted that the financial sector in the U.S. and elsewhere faces a much lower tax burden than other sectors.

If a town has twenty gambling casinos and 19 of them pay heavy taxes, then we would expect the 20th casino to enjoy much higher profits. This is a signifcant part of the story of the high pay and big profits on Wall Street.

There is a much longer list of ways in which the government redistributes income upwards. It is cute how people like Fukuyama and Ignatius pretend that the upward redistribution was just the natural workings of the market and then wring their hands over the unfortunate implications, but this is kids' stuff. Serious people need not pay attention to such nonsense.

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